With the holiday season around the corner, it is notable that heavyweights like Wal-Mart and Amazon started their Black Friday deals – in October. Also noteworthy is the rationale for this: nobody knows when they will be able to reliably source and distribute goods!
It seems like every aspect of our supply chain is broken. Manufacturing has been disrupted worldwide. Shipping backlogs are the highest they have been in ages. Energy prices are skyrocketing as we feel the delayed impact of production reductions from the beginning of the epidemic. Even after goods make it to the shores, labor shortages from the docks, in the trucks, and at the warehouses continue to impact costs and timelines.
As we enter the fourth quarter of 2021, it feels like a good time to reflect on the past year, look at what trends we are seeing (and why), and see if we can read the tea leaves a bit as to what lies in the not-to-distant future in terms of our supply chain.
The Status of Today’s Supply Chain – And How we Got Here
Manufacturing levels have fallen sharply since the onset of the coronavirus. What’s worse, they continue to fall even after more than a year of adaptation.
Chip shortages caused by shutdowns in Asia have created a domino effect on the entire supply chains of the automotive, durable goods, and computer/electronics industries. For example, German car production is running 40% below pre-pandemic levels, following a massive 17.% fall in auto parts.
With manufacturing down all over the world, energy production was lowered by OPEC and other producers to respond to a reduction in demand. The reduction in energy consumption after COVID began was real – down 4.5% over pre-pandemic levels. But after vaccinations began taking hold, energy consumption worldwide began to increase dramatically. This increase is continuing to occur at a pace much faster than production can be brought up after a year of idling.
Combined with the increased labor costs, energy prices are creating obstacles for manufacturers to restart their production and distribution. With unreliable production and distribution channels and ever-increasing costs on the horizon, retailers are already trying to put products on shelves for the holiday season. Amazon and Wal-Mart began their Black Friday deals in October this year, and Walgreens began selling Christmas candies in their stores as well.
There is a great fear of missing out on what, for many retailers, is their major profit center – holiday sales. This has exacerbated the backup in the ports. The Port of Los Angeles, which accounts for nearly 40% of trans-oceanic freight entering the United States, has seen a steady increase in the number of ships waiting to offload at its docks. This has led to the number of days to transit skyrocketing from around 40 days to 73 since the pandemic began.
The labor shortage and increased labor cost have also contributed to the exacerbation of this issue. Recent efforts by the federal government aimed at alleviating the backlog by running the port 24/7 may help move the bottleneck. It will, however, only push the backlog from the ports to the trucking and last-mile infrastructure which are also challenged by increased energy costs and a labor shortage.
And that increased purchasing being implemented by retailers? That has led to a spike in demand for warehousing space. The lack of available labor and dramatic increase in demand for space has led to increased costs for distributors and retailers as shelf space is hard to find.
As we enter the fourth quarter of 2021, energy costs and labor availability continue to challenge our supply chain. Warehouse space is hard to find and inflationary pressures are beginning to hit every major segment of our economy. This is our new reality.
What does the Future Hold?
Much like a car that has run out of gas, one cannot simply add gas and expect it to turn on right away. Even with ports running 24/7, even with higher-than-ever wages being paid to warehouse workers and truckers, this will take a long time to unravel.
Look for inflationary pressures to take hold in 2022. There will likely be an increase in the workforce as a planned vaccination plan for children ages 5-11 will allow more parents to return to the labor force.
Energy production is being ramped up and relief should be found at some point later in 2022. The uncertainty here lies in Russia’s manipulation of the natural gas markets in Europe and how that may impact adjacent energy markets by shifting demand. Overall, however, this should come back in check sometime next year.
Manufacturing and distribution will likely take longer to unwind. Particularly with the worldwide dependence on Asia for electronics manufacturing, look for a continued increase in demand for warehousing space and longer wait times for durable goods, consumer electronics, and automotive parts.
We can only hope that the inflationary pressures we are experiencing today will subside, but it is simply too early to tell. But 2022 is likely to start out feeling much like 2021 – expensive, unpredictable, and volatile. We will have to wait and see what it ends like.